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Tempus: New drugs hold key as patent losses bite

Buy, sell or hold: today’s best share tips

Markets are curious beasts, as it has been said here before. AstraZeneca’s Nexium heartburn treatment went off patent in 2014. That presaged a decline in sales as cheaper generic copies hit the market.

Its Crestor anti-cholesterol drug goes off patent in May. This accounted for more than $5 billion of total sales of $24.7 billion in 2015, the biggest seller, and generic competition will also kick in.

The pharmaceutical company has made a couple of significant acquisitions, paying $2.7 billion for ZS Pharma late last year and, in December, agreeing to take a majority stake in Acerta Pharma of the Netherlands. Both deals will clearly be earnings dilutive in the near term. The high dollar is another negative.

The company told analysts yesterday that, had the 2013 exchange rate continued into 2015, the $6.9 billion core operating profit reported last year would have been nearer $8.4 billion.

All this is widely known. The patent cliff has been looming for years. This year was always going to be the trough, as AstraZeneca waits for its promising new compounds, many in exciting new areas of cancer treatment, to come to market.

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This year there will be a “low to mid-single digit” percentage fall in both revenues and profits. Earnings per share will decline from $4.26 to something nearer to $4.

This is hardly a profit warning, then, but the market sent the shares 269p lower to £41.43. This is substantially below the £55 on offer from Pfizer less than two years ago, but that is a dead issue. Pascal Soriot, the chief executive, is sticking to his forecast that the company can grow revenues to $45 billion by 2023.

Last year sales from “growth platform” drugs, as opposed to legacy ones such as Crestor, were up by 11 per cent and accounted for 57 per cent of the total. The next year could be an interesting one in terms of news flow. AstraZeneca expects to submit six of its compounds to the regulatory authorities and update on progress on ten.

The dividend is held at $2.80. It is unlikely to be increased this year, but this still suggests a forward yield of 4.7 per cent, a good enough income to earn while awaiting developments.

MY ADVICE Buy
WHY The income from the shares is sufficient to allow them to be held during the trough years as the company fulfills its promises

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As I said here a year ago in the context of Beazley, one day the insurance cycle will turn. One day claims, catastrophe-related or otherwise, will start to rise again and the industry will look rather less attractive to the providers of funds that have been investing there. It hasn’t happened yet. For now, as the Lloyd’s of London insurer says, the industry is “awash with capacity”.

Beazley’s response has been to move further into specialist areas in the US, now the majority of the business, into professional indemnity and insurance against cyber-crimes. If the current benign environment continues, though, one day that excess capital will percolate into these as well.

So, as the company admits, the 19 per cent return on equity seen in 2015 can probably not be maintained, even if the returns it makes will still be at the top end for the sector. That return is despite the minimal amounts being made on capital held by the company because of low interest rates. Beazley continues to hand back capital to investors while it can, a special dividend of 18.4p for last year topping the 11.8p paid for 2014.

The shares, flat at 361½p, trade on twice net asset value. Given the uncertainties, that looks a bit toppy.

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MY ADVICE Avoid for now
WHY Shares seem fully priced at this level

Never mind Lord Lucan, the death was announced this week of another long-running and elusive fugitive, the takeover offer by Stryker of the US for Smith & Nephew. This one has been doing the rounds in the market for years; Stryker on Monday paid $2.78 billion for a maker of disposable hospital products, and S&N shares fell accordingly.

That is not to say there is no longer any bid premium in the price - off 15p at £11.01, the shares change hands on 17 times’ this year’s earnings, which suggests some. The company, though, must now be judged on its merits. It is most of the way through a programme to cut costs by $120 million a year. It is investing in higher-margin products, such as the $279 million purchase of Blue Belt Technologies, which is involved in robotics-assisted orthopaedic surgery.

The knee replacement business in North America is comfortably outpacing the market as a whole. In sports medicine, another area earmarked for investment, US sales were up 17 per cent as the earlier purchase of ArthroCare allowed a wider range of products to be marketed to surgeons.

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Annual trading profits were therefore up by $44 million to $1.01 billion. The two negatives are currencies and China. The share price fall was mainly down to guidance that margins would be a touch lower this year because of the strong dollar. Growth in emerging markets slowed towards the end of the year as uncertainty in China led to some destocking, though for demographic reasons that country is a plain source of future growth.

Unless you believe S&N will one day soon attract that long-awaited bid, that multiple looks a full one.

MY ADVICE Avoid for now
WHY Takeover prospects are still in the price but unlikely

And finally ...

Primary Health Properties, which I have highlighted before for its safe as houses near-5 per cent dividend yield, crossed an important milestone yesterday. The company buys NHS properties and rents them back to doctors and pharmacies, so that income is guaranteed by the state. Since 2009 those dividends have been uncovered, as it built up its portfolio. For 2015 the 5p dividend is finally covered by earnings, after a 20 per cent uplift in these. The value of that portfolio also rose by £100 million to £1.1 billion, with plenty of other deals in the pipeline.

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Follow me on Twitter for updates @MartinWaller10

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